Financial crisis of underwater mortgages and bad mortgage backed securities is still out there. Inflation could make that problem disappear but at the expense of fixed interest investors and savers. Banks lending money increases the money supply and banks lowering their loan balances decreases the money supply, increased money supply normally causes inflation. However banks have switched from being too generous with their lending to being arguably too stingy with their lending which in turn is making it difficult for small business to function. By buying treasuries(QE) the Fed is trying to get banks to lend and stimulate the economy.
I'll rant for a bit - Devaluation of the currency is the long term solution for the USA's economic problem. Suppose 1 dollar = 50 Rupees. Suppose a US programmer of a certain skill level must be paid salary and benefits at a rate that works out to $75 an hour. Suppose a comparably skilled Indian programmer gets paid 750 Rupees an hour which = $15 an hour. Then employers of programmers would benefit from laying off programmers in the US and hiring programmers in India.
To stop the incentive to lay off American programmers one of three things must happen:
1. US wages in dollars must fall closer to the Indian wage level.
2. Indian wages in rupees must rise closer to the American wage level.
3. The exchange rate must change until the American wage in dollars is closer to the Indian wage in rupees.
Normally when a nation runs a trade deficit the nation's currency falls because the exporting nation acquires more currency from the importing nation than they have any use for so supply and demand of currencies pushes down the value of the importing nation's currency and pushes up the value of the exporting nations currency until "comparative advantage" restores balanced trade.
The problem for the USA, Europe and Japan is that history of their currencies being stable and liquid makes them seem like a good place for people from less stable nations to store their wealth. The US trade deficit is being balanced ny foreigners storing their wealth in the US and by nations storing wealth in the USA for the purpose of suppressing their own currency. China's purpose for buying US treasury notes is mainly to suppress their own currency so that their labor cost does not get undercut by nations like India and Vietnam.
Which Americans win and which Americans lose by China storing wealth in the US?
American shoppers win.
American travelers win.
Americans wanting to buy foreign assets win.
Companies buying/making cheap goods in China and then selling them for a nice mark up in the USA win.
American workers lose.
Stein's Law "Things that can't last forever don't last forever" - Foreigners can't buy US financial assets forever. Eventually they would run out of assets to buy. When the investment inflow stops the trade deficit will cause the dollar to drop. When this happens because decades of outsourcing has moved the productive capacity outside of the USA, then future American shoppers will suffer severely. The American service economy relies on the inflow of foreign investment dollars to circulate through the US economy and create demand. A fall in demand creates layoffs which creates another fall in demand which creates more layoffs and a downward spiral.
We can't live by housekeepers, cooks, doctors and lawyers alone. The service economy needs the non-service economy to be healthy. Selling Assets to foreigners to offset producing less than we consume is the equivalent of a person using credit cards to consume more than he earns - It can't last. We can not produce as much as we consume when the dollar is too high for American workers to be competitive. Repeating myself: The dollar is too high and higher than it's "natural" level because of our sale of financial assets. We need to find a way to stop being a net seller of financial assets and then the dollar would fall by itself.
